For the most part, the global supply chain slowdown during the height of the COVID-19 pandemic has regained its pace, but that doesn’t mean that manufacturers of consumer goods are out of the woods just yet. Weak economies mean that revenues are generally low across the board, leaving management to constantly run cost reduction analyses to keep their operations afloat.
Employee costs are usually the first to get slashed, but from an ethical standpoint, especially during a pandemic, that should be considered a last resort. Before reaching that point of exasperation, you may consider a few different cost reduction options, though it is important to consider all consequences of taking these actions. Here are a few strategies for consumer goods manufacturers to avoid in their cost reduction analysis.
Try to do everything on your own
It can certainly be stressful to be in a management position under the gun to cut costs. Pouring over a cost reduction analysis is not a task to be carried out alone, and managers should consider using a professional service to do so. The expense of hiring a professional service will almost certainly be offset by the money they help you save. Good firms will use advanced data analytics to find the least intrusive way to cut costs.
Cost reduction should be about spending smarter, not only using scissors.
Reduce material quality
Material costs for consumer goods are usually one of the highest on the “expenses” ledger, so they may stand out as targets to be cut. This ultimately means that products will be of lesser quality and have the potential to damage your brand image; customers will notice the difference.
This is a mistake that many brands make that causes irreversible damage. Customers will lose faith in the quality of your goods and are likely to share bad reviews online. Cleaning up a mess made in production will ultimately cost more than the savings made by cutting quality.
Another angle of cost reduction analysis on material costs is increasing order quantities of raw materials to save money per piece. Without concrete demand planning that warrants the over-supply of raw materials, supply chain managers would be taking a substantial financial risk. Excluding warehousing costs, which would go up in this scenario, there is significant risk in overstocking materials that won’t get used due to things like product improvements or changes in production.
Operations staff would be smart to avoid this strategy, even if the short-term financial relief is attractive.
Cut digital advertising
You will see this advice a lot online, mostly by those whose cost reduction analysis does not understand the power of digital marketing. While there is merit to the claim that advertising spending doesn’t provide high value for the money spent, digital marketing doesn’t follow that rule. A targeted and expertly executed digital campaign can be more cost-effective and have a higher conversion rate than some above-the-line marketing activities.
Rather than cut digital spending, marketing managers should reallocate spending to more successful campaigns that drive sales conversion.